5 ms·

This was a bank run, except it involved money market accounts. Money market accounts hold a lot of short term corporate debt. After Lehman went bankrupt, a few

This was a bank run, except it involved money market accounts. Money market accounts hold a lot of short term corporate debt. After Lehman went bankrupt, a few prominent money market accounts that held Lehman debt "broke the buck", ie paid out less than what investors put in. Since money market accounts weren't insured at the time, this set off a panic. People likely called their fund managers, trying to redeem their funds, to move it to FDIC insured bank accounts. If fund managers tried to redeem over 50% of their funds at once (as some funds experienced), that would explain hundreds of billions of dollars draining out in an hour. If the money market accounts crashed, financial companies wouldn't have been able to roll over their short term debt, which they rely on for day-to-day operations. Non-depository institutions (like the surviving investment banks) would be forced into bankruptcy. Those bankruptcies would cascade, and depository institutions would fail as well, probably with bank runs on accounts over the FDIC limit. What made the Great Depression great were the banking crises. Without a functioning financial system, a modern economy can't grow. And if we reached a point where people couldn't even get money out of ATMs, we're talking about complete social breakdown. One Congressman claimed the administration talked about martial law as a real possibility. We really did come close to the brink. And the downward cycle went even faster than prescient bears like Nouriel Roubini thought it would.

jacquesm 18y ago
Thank you, that's the clearest explanation of this whole thing that I've read to date.
richcollins 18y ago
> financial companies wouldn't have been able to roll over their short term debt, which they rely on for day-to-day operations The fact that they rely on debt for day-to-day operations should be a red flag that they are doing something wrong.
- catch23 18y ago
  I think it's mostly as a way to smooth out their financial numbers, even companies with tons of money in the bank still uses short term debt on daily basis... at least that was how a business owner explained it to me.
  - richcollins 18y ago
    > smooth out their financial numbers So how will they fail if they don't have access to it?
    - newt0311 18y ago
      Excess inefficiencies if they have to adjust immediately. They would have to unroll all the debt in a few days instead of the months it would take to unroll the debt in an orderly fashion.
- ckinnan 18y ago
  It is interesting, for cultural and for business reasons, most tech companies do not use debt markets. (Tech companies-- especially software companies-- generate lots of cash flow and aren't as capital intensive as other industries). There are also federal tax breaks that encourage the use of debt financing.
  - eru 18y ago
    Your country's tax system is not alone in that regard.
- jaaron 18y ago
  That's not the way the commercial paper market works. Many companies use this for payroll and managing cash. It makes sense to use someone else's money when the interest rate is low enough that you can put your own cash into better use. I wouldn't be too critical about this practice unless you have experience as a treasurer or CFO.
  - richcollins 18y ago
    I'm not saying it doesn't make sense given the environment that they work in. I'm saying that the environment that they work in doesn't make sense.
anamax 18y ago
> Non-depository institutions (like the surviving investment banks) would be forced into bankruptcy. Forced by whom? Banks are required by govt law to have more assets than liabilities, but many institutions and individuals owe more than they have to no ill effect. In the short-term, cash flow is the only thing that matters and even that is under some control. A bank can "simply" refuse to pay money that it doesn't have. Yes, there will be consequences, but later, giving the bank time to do something useful. However, current govt reserve requirements don't allow that. Yes, I know the reason behind such requirements. My point is that they make certain bad situations worse and it's not clear that such amplification is required for the claimed benefits.
- newt0311 18y ago
  assets != cash. Also, if the cash reserves die out, they will probably fall short of the reserve requirements in place.
  - anamax 18y ago
    I didn't say (write actually) that assets are cash. I asked who would force the banks into bankruptcy and suggested that not doing so (immediately) might have been better than a total financial system collapse, which was supposedly the only other alternative to the massive cash infusions. When I run out of cash or my liabilities exceed my assets (short term or long term), no one shuts me down immediately. I keep collecting cash and spend it as it comes in. The folks who I owe money to aren't happy when I skip payments, and eventually that affects my ability to do biz on anything other than a cash-basis, but there's no immediate shutdown. In fact, most US bankruptcies are initiated the debtors, not the creditors, so the debtors can get out of unprofitable deals. (This isn't true in the UK.) But we treat banks differently. As soon as they reach certain financial "targets", we shut them down. This is a choice that has consequences.
- baguasquirrel 18y ago
  These aren't just banks. These are all corporations in the modern world, period. Everyone from Target to Citi issues notes in the money markets. And yes, the banks are required to have more assets than liabilities. But that has nothing to do with the money markets or day to day operations. Here's a crappy, but workable analogy. What do you do in a modern computer? Have enough money for all the programs that are running, up front? Or do you have some shared virtual pool of memory? The money market is kind of like that. It's silly for each and every corporation to have all the cash on hand it needs for day to day operations. That would require a lot of money that would be sitting around doing nothing. A much more efficient system is to have lenders who dole out short term loans (that pay darn little but are almost guaranteed to pay back) to the corporations as they need them. Suppose that January is just a nasty month, and Target has to dole out lots of money to its health insurance benefits. That's fine, they'll just issue more commercial paper, and it will all work out when they tally up the bills at the end of the quarter. Without that money market, what would happen instead is that Target would either have to keep a lot more money lying around, or run into a brick wall if something bad happened. It's like forcing everyone to buy many times more memory for their computer than they would need in everyday situations.
jwilliams 18y ago
Without a functioning financial system, a modern economy can't grow. This is a good line - with all the (justifiable) negativity around at the moment it's easy to forget that we still need (good) finance to move forward.
icefox 18y ago
I wonder how long people will say "called their fund managers" when really most just use their dedicated app or log into a website and click a few things.
- aasarava 18y ago
  When you're talking about wealth in the multi-millions and even billions, many people do employ money managers. I have friends who work at small money management firms that have only one or two clients.
alecco 18y ago
> And if we reached a point where people couldn't even get money out of ATMs, > we're talking about complete social breakdown. And in a country like USA it would mean a civil war. People have a tendency to freak out too much, like post 9/11. I don't see the Argentinean-style civil protests and spontaneous grassroots organizations. I'd bet on dog-eat-dog. (I write this with sadness.)
- tallanvor 18y ago
  Come on, sure it would be hard on people, but it would not mean a civil war. --Exactly who do you think would be fighting who? The government would be doing all they could to get people access to their money, and while there will always be idiots out there, the population isn't quite as stupid as you might like to believe (even though a majority technically voted for Bush once).
ckinnan 18y ago
Only one broke the buck, the Reserve Fund. And they shouldn't have been anywhere near risky Lehman debt. That's what sparked the run-- people wanted out of the Reserve Fund and other investors were freaked that other money markets holding similar risky paper. The situation was fixed directly with a federal guarantee for money markets-- but the example was used as part of the fear-mongering to pass the TARP, which has absolutely nothing to do with money markets. Also money markets/commercial paper debt markets are important to all businesses issuing short term debt, not just financials.
nostrademons 18y ago
Sometimes I wonder what would've happened had corporations actually found the commercial paper markets totally frozen (as opposed to mostly frozen) and themselves unable to finance daily operations. Would they really say "Okay everybody go home, we have no money" or would they say "Well fuck, nobody knows if hey're gonna get paid, but we got nothing better to do, so we might as well continue doing business." The economy as a whole seems remarkably resilient considering that it's all built on confidence. In cases where trade completely collapses, firms often "evolve" an alternative currency - scrip, cigarettes, foreign currencies, paper ledgers. I wonder if established firms with longstanding business relationships would've just said "Well, nobody can get cash right now, but I'll make an entry in our Oracle database and we can sort out the mess later."

jacquesm 18y ago

Thank you, that's the clearest explanation of this whole thing that I've read to date.

richcollins 18y ago

> financial companies wouldn't have been able to roll over their short term debt, which they rely on for day-to-day operations The fact that they rely on debt for day-to-day operations should be a red flag that they are doing something wrong.

catch23 18y ago
I think it's mostly as a way to smooth out their financial numbers, even companies with tons of money in the bank still uses short term debt on daily basis... at least that was how a business owner explained it to me.
- richcollins 18y ago
  > smooth out their financial numbers So how will they fail if they don't have access to it?
  - newt0311 18y ago
    Excess inefficiencies if they have to adjust immediately. They would have to unroll all the debt in a few days instead of the months it would take to unroll the debt in an orderly fashion.
ckinnan 18y ago
It is interesting, for cultural and for business reasons, most tech companies do not use debt markets. (Tech companies-- especially software companies-- generate lots of cash flow and aren't as capital intensive as other industries). There are also federal tax breaks that encourage the use of debt financing.
- eru 18y ago
  Your country's tax system is not alone in that regard.
jaaron 18y ago
That's not the way the commercial paper market works. Many companies use this for payroll and managing cash. It makes sense to use someone else's money when the interest rate is low enough that you can put your own cash into better use. I wouldn't be too critical about this practice unless you have experience as a treasurer or CFO.
- richcollins 18y ago
  I'm not saying it doesn't make sense given the environment that they work in. I'm saying that the environment that they work in doesn't make sense.

anamax 18y ago

> Non-depository institutions (like the surviving investment banks) would be forced into bankruptcy. Forced by whom? Banks are required by govt law to have more assets than liabilities, but many institutions and individuals owe more than they have to no ill effect. In the short-term, cash flow is the only thing that matters and even that is under some control. A bank can "simply" refuse to pay money that it doesn't have. Yes, there will be consequences, but later, giving the bank time to do something useful. However, current govt reserve requirements don't allow that. Yes, I know the reason behind such requirements. My point is that they make certain bad situations worse and it's not clear that such amplification is required for the claimed benefits.

newt0311 18y ago
assets != cash. Also, if the cash reserves die out, they will probably fall short of the reserve requirements in place.
- anamax 18y ago
  I didn't say (write actually) that assets are cash. I asked who would force the banks into bankruptcy and suggested that not doing so (immediately) might have been better than a total financial system collapse, which was supposedly the only other alternative to the massive cash infusions. When I run out of cash or my liabilities exceed my assets (short term or long term), no one shuts me down immediately. I keep collecting cash and spend it as it comes in. The folks who I owe money to aren't happy when I skip payments, and eventually that affects my ability to do biz on anything other than a cash-basis, but there's no immediate shutdown. In fact, most US bankruptcies are initiated the debtors, not the creditors, so the debtors can get out of unprofitable deals. (This isn't true in the UK.) But we treat banks differently. As soon as they reach certain financial "targets", we shut them down. This is a choice that has consequences.
baguasquirrel 18y ago
These aren't just banks. These are all corporations in the modern world, period. Everyone from Target to Citi issues notes in the money markets. And yes, the banks are required to have more assets than liabilities. But that has nothing to do with the money markets or day to day operations. Here's a crappy, but workable analogy. What do you do in a modern computer? Have enough money for all the programs that are running, up front? Or do you have some shared virtual pool of memory? The money market is kind of like that. It's silly for each and every corporation to have all the cash on hand it needs for day to day operations. That would require a lot of money that would be sitting around doing nothing. A much more efficient system is to have lenders who dole out short term loans (that pay darn little but are almost guaranteed to pay back) to the corporations as they need them. Suppose that January is just a nasty month, and Target has to dole out lots of money to its health insurance benefits. That's fine, they'll just issue more commercial paper, and it will all work out when they tally up the bills at the end of the quarter. Without that money market, what would happen instead is that Target would either have to keep a lot more money lying around, or run into a brick wall if something bad happened. It's like forcing everyone to buy many times more memory for their computer than they would need in everyday situations.

jwilliams 18y ago

Without a functioning financial system, a modern economy can't grow. This is a good line - with all the (justifiable) negativity around at the moment it's easy to forget that we still need (good) finance to move forward.

icefox 18y ago

I wonder how long people will say "called their fund managers" when really most just use their dedicated app or log into a website and click a few things.

aasarava 18y ago
When you're talking about wealth in the multi-millions and even billions, many people do employ money managers. I have friends who work at small money management firms that have only one or two clients.

alecco 18y ago

> And if we reached a point where people couldn't even get money out of ATMs, > we're talking about complete social breakdown. And in a country like USA it would mean a civil war. People have a tendency to freak out too much, like post 9/11. I don't see the Argentinean-style civil protests and spontaneous grassroots organizations. I'd bet on dog-eat-dog. (I write this with sadness.)

tallanvor 18y ago
Come on, sure it would be hard on people, but it would not mean a civil war. --Exactly who do you think would be fighting who? The government would be doing all they could to get people access to their money, and while there will always be idiots out there, the population isn't quite as stupid as you might like to believe (even though a majority technically voted for Bush once).

ckinnan 18y ago

Only one broke the buck, the Reserve Fund. And they shouldn't have been anywhere near risky Lehman debt. That's what sparked the run-- people wanted out of the Reserve Fund and other investors were freaked that other money markets holding similar risky paper. The situation was fixed directly with a federal guarantee for money markets-- but the example was used as part of the fear-mongering to pass the TARP, which has absolutely nothing to do with money markets. Also money markets/commercial paper debt markets are important to all businesses issuing short term debt, not just financials.

nostrademons 18y ago

Sometimes I wonder what would've happened had corporations actually found the commercial paper markets totally frozen (as opposed to mostly frozen) and themselves unable to finance daily operations. Would they really say "Okay everybody go home, we have no money" or would they say "Well fuck, nobody knows if hey're gonna get paid, but we got nothing better to do, so we might as well continue doing business." The economy as a whole seems remarkably resilient considering that it's all built on confidence. In cases where trade completely collapses, firms often "evolve" an alternative currency - scrip, cigarettes, foreign currencies, paper ledgers. I wonder if established firms with longstanding business relationships would've just said "Well, nobody can get cash right now, but I'll make an entry in our Oracle database and we can sort out the mess later."